"Nightmare scenario" as one in three youngsters willing to scrap pension for Lisa
More than a third of young employees would rather save into a Lifetime Isa (Lisa) than a pension, research has revealed, threatening to undermine the improvements in pension saving achieved through the auto-enrolment scheme.
34% of employees aged between 16 and 34 years old said they would prefer to use an Isa to save for retirement than a pension even if it meant giving up their employer's contribution, according to employee benefits consultancy Capita.
The firm's annual Employee Insight Report, which surveys more than 3,000 people in employment, also found that if they could access their pot more flexibly (to buy a house, for example), 38% would be willing to give up their employer's pension contribution. However, given a straight choice between Lisa and pension, the majority (42%) would stick with a pension.
Steve Webb, director of policy at Royal London and former pensions minister, says that “mass opt-outs from workplace pensions into Lifetime Isas would be the nightmare scenario”.
“After decades in which it was impossible to get young people to save, automatic enrolment has seen over two million under-40s enrolled into a workplace pension with an employer contribution,” he says.
“To undermine this through a rival product would truly be snatching defeat from the jaws of victory.
“If young people get into the habit of opting out of workplace pensions while they save for a deposit, we may never get them back into workplace pension savings once they have bought a house.
“One of the great advantages of a workplace pension is the employer contribution, and to forgo that for a decade or more could be seriously damaging to the long-term pension prospects of younger workers.”
The government began phasing in automatic enrolment four years ago; since then 6.5 million workers have been enrolled into a pension scheme, with an opt-out rate of around 10% according to the latest figures.
This has led to more people than ever, 33.5 million, enrolled as members of an occupational pension scheme, according to the Office for National Statistics. However, the same report shows they are contributing far too little.
The average contribution into a defined contribution (DC) pension is a ”shockingly low” 4% of earnings compared to 21% into defined benefit schemes.
Evaluating the options
The Lisa, meanwhile, is due to be launched in April 2017 and allows those under 40 to save either towards a deposit for a first house or for their retirement.
It allows people to save up to £4,000 per year and receive a government bonus of 25% in addition. However, should you wish to withdraw money for other uses, you will forego the government bonus and face a 5% charge.
The Capita report found that 60% of 16-34 year olds welcome the creation of the Lisa, although 32% said they did not know, “suggesting more information and advice is needed”, the firm says.
Anish Rav, head of DC proposition and strategy at Capita Employee Benefits, says: “It's easy to see how [the] Lisa could become popular, but it's crucial that younger employees properly evaluate just what they will be giving up if they do decide to stop saving into their pension to redirect into a Lisa.
“While the research reveals growing trust in the pensions industry, it is also clear employers need to be doing as much as possible to explain and communicate the options their employees have at their disposal.”
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.